Court Sharpens Causation Standard in All-Risk Policies in Church Mutual Case

In all-risk policies, an excluded cause of damage must be the sole cause of damage for the exclusion to apply, a federal appeals court decided last week in an opinion that clarifies North Carolina law but could make some claims more costly for insurers.

“The district court’s conclusion comports with North Carolina precedent, which has set out different causation standards for all-risk insurance policies than what applies to other types of insurance coverage,” the U.S. 4th Circuit Court of Appeals wrote in Wake Chapel Church vs. Church Mutual Insurance.

The precedent is a 1973 decision by the North Carolina Supreme Court, which laid down a general rule that, for all-risk policies, “coverage will extend when damage results from more than one cause—even though one of the causes is specifically excluded,” the appellate judges explained.

Church Mutual May Face Larger Class Action in Labor Depreciation Question

Church Mutual Insurance may soon have more than the limits of a policy exclusion to deal with, after a federal appeals court raised the possibility of a 10-state class-action lawsuit over depreciation of labor in claims payouts.

The U.S. Sixth Circuit Court of Appeals on Monday struck down a lower court’s decision to limit the proposed class action to Church Mutual-insured churches in just five states. It’s now up to the federal district court in Tennessee to more thoroughly examine state court rulings to determine if dozens more churches can be included in the litigation.

“A party has the initial burden to provide a court with authorities for its position,” the 4th Circuit judges wrote. “But once it does that, a court has the affirmative duty to resolve the issues before it—even the tough ones.”

Class actions claiming inappropriate depreciation of labor in actual cash value payouts have been filed against a number of property insurers in recent years, alleging that many states do not allow depreciation of labor and other non-material costs. Thousands of homeowners in Alabama alleged that a State Farm Insurance unit shorted them on payments by depreciating labor. That case was settled in 2022.

In 2023, plaintiffs similarly charged that Trumbull Insurance underpaid by as much as $5 million on claims. The case is similar to one decided by the Arizona Supreme Court in 2022 in Walker v. Auto Owners. That court held that under the Walkers’ homeowners policy the insurer could not depreciate the cost of labor in determining the ACV because of the ambiguity in the policy language over labor depreciation and the reasonable expectations of the insured.

But until now, church insurers have not faced many class actions regarding labor depreciation questions. In the Tennessee case, Generation Changers Church, in Nashville, was damaged by a tornado in 2020. Church Mutual paid the claim but church leaders took issue with the fact that the payment was $26,750 less than expected—due to the insurer’s depreciation of labor in determining actual cash value.

The policy was silent on whether the ACV calculation subtracts depreciation for non-material costs—like labor—as it does for material costs, the court noted. The plaintiffs filed a proposed class-action lawsuit in federal court, arguing that churches in other states faced similar shortfalls that were not allowed by statute. Church Mutual argued that some states, such as Texas, do allow depreciation of non-material costs.

The 4th Circuit judges said the lower-court judge had failed to fully analyze state and federal court rulings in five states before slashing the scope of the proposed class-action. The opinion can be seen here.

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The 4th Circuit’s Feb. 19 decision hinged on the cause of scratches and scrapes on Wake Chapel’s metal roof in Raleigh. The church filed a claim in 2018, arguing that the damage was the result of a heavy snowstorm. An engineer reported that ice and snow sliding on roof was one cause of the damage.

Wisconsin-based Church Mutual, one of the world’s largest insurers of churches, denied the claim, contending that the scratches came from workers and a crimping machine when the roof was installed almost two decades earlier. The installers had also failed to apply a protective coating on the roof, the insurer said. The church’s policy excluded payment for damages caused by decay, deterioration, latent defect or “a quality of the property that causes it to damage itself.”

The chapel filed suit, alleging breach of contract and bad faith. After a four-day trial, a jury found in favor of Wake Chapel, noting that the snowstorm caused the damage. The jury awarded $1.1 million for actual cash value on the roof. Church Mutual asked for a directed verdict overruling the jury. The district court judge declined, and the insurer appealed to the 4^th Circuit.

Church Mutual argued on appeal that the lower court had applied the wrong causation standard. Under North Carolina law and a 1957 high court ruling, an excluded cause may be considered only the predominant cause of the damage, not the sole cause, in order to be excluded. Put another way, a covered cause must be the main cause of damage to permit recovery. The chapel’s engineer had not established that, the insurer argued. Also, the harm from the roof installation came well before the policy period.

“If property is already damaged, and a separate cause later makes the damage worse, that does not transform existing and uncovered damage into a covered loss,” wrote Church Mutual’s attorneys, Steven Bader and Jennifer Welch, in a reply brief in the appeal.

But the appellate panel pointed out that the precedent opinion cited by Church Mutual’s lawyers did not examine an all-risk policy. In a 1973 case, known as Avis vs. Hartford Fire Insurance, the state court established a different standard for all-risk policies. Later, the state Supreme Court clarified further and explained that, in the Avis ruling, court held that the insurer must provide coverage where one cause of an accident is covered by an all-risk insurance policy and the other is not.

“Avis and later cases compel the conclusion that all-risk insurance policies provide coverage where a cause that is not subject to an exclusion at least partially contributed to the damage,” the 4^th Circuit panel concluded.

Because the parties do not dispute that Church Mutual issued Wake Chapel an all-risk policy, the district court correctly employed a causation standard in line with the Avis opinion, the panel noted.

Attorneys involved in the case could not be reached Monday.

Related: 11th Circuit Upholds $1.75M Verdict Against Church Mutual on Georgia Roof Claim